Discharging a trustee is a complex but sometimes necessary task. The fiduciary removal attorneys at Iowa Probation Litigation recognize the courts are reluctant to eliminate trustee positions but will do so only when the fiduciary breaches a duty set forth in Iowa Trust Code §633A.4107.
The Court of Appeals of Iowa reaffirmed this recently when applying the Code to settle a dispute where two siblings sought to replace their trustee sister with another sister—both the lawsuit and the Court’s ruling show us just how problematic removing an executor, trustee and guardian can be in Iowa.
Loving Father Bequests His Legacy to His Kids
Virgil De Groote’s revocable trust agreement left his five children, Karen, Theresa, Christopher, Sharon, and Curtis, equal parts of his estate. The testamentary document accordingly assigned Karen as trustee with her sister Theresa as a replacement should Karen quit, pass away or be dismissed.
Karen would control estate assets “without approval of any court or person,” according to the trust, however, the estate plan allowed the siblings to seek the court’s help whenever circumstances warranted.
Finally, Virgil’s estate plan required Karen to provide her brothers and sisters with an annual estate accounting where once a beneficiary received and accepted the document, he/she will have released Karen of breach of fiduciary duty for that year.
Daughters Claim Trustee Ignored Her Fiduciary Duties
Virgil administered the trust until his passing in June 2015, and by the middle of 2016, sisters Theresa and Sharon were already asking Karen to produce an estate accounting.
Karen however did not comply, according to legal action brought by the sisters, who asked a district court in equity to force their sister to produce the reports, and later, to remove Karen as fiduciary and replace her with Theresa.
According to the lawsuit, Karen had breached her fiduciary duties when failing to report and communicate with beneficiaries. The court agreed with the plaintiffs in part and ordered Karen in January 2017 “[to] provide all beneficiaries a complete itemized accounting within thirty days” and to submit an appraisal of estate assets to each sibling.
An amended petition filed in March 2017 claimed Karen did not obey the court’s order, calling for the judiciary to hold the trustee in contempt and to remove her. Theresa and Sharon’s complaint further pleaded that Karen must pay their attorney fees and expenses for moving the action forward.
District Court Removes Trustee and Orders Her to Pay Restitution
Karen’s fiduciary litigator responded by asserting the trustee provided “some of the beneficiaries” with a complete accounting in February 2017, and she served the defendants with the same documents two days later, which all parties accepted without objection.
The trustee therefore satisfied the court’s demand for special performance, according to Karen, and the defendants released Karen of any negligence after accepting the accounting reports.
Later that year, District Court Judge C. Foy ruled Karen’s subsequent response to the court’s order was not contemptuous, but Foy agreed to discharge the trustee despite this fact.
However, instead of replacing Karen with Theresa as indicated in Virgil’s estate plan, Judge Foy assigned the fiduciary duty to a local bank after finding none of the siblings held the capacity to manage the trust impartially.
The district court further ordered Karen to pay $7500 to Theresa and Sharon for attorney’s fees “as a sanction” for her failure to follow the court’s special order.
Trustee Claims District Court Abused its Discretion
On appeal, Karen held Judge Foy erred when removing her as trustee and when punishing her for not complying with the court. Theresa and Sharon also appealed the $7500 award, claiming the amount provided did not cover all their legal expenses.
The Court of Appeals in Iowa reviewed the case in 2019 where Judge R. Doyle considered three issues: (i) whether Karen’s discharge was fair and permissible under the law; (ii) whether the Court can increase the attorney fee award; and, (iii) whether the law allows courts to punish trustees for negligent performance and hold them personally liable to pay a defendant’s attorney fees.
Trustee Removal Issue
In Doyle’s opinion, the equity (non-jury) courts in Iowa hold subject matter jurisdiction to hear trustee, executor and guardianship removal proceedings and complaints of estate accountings per Iowa Probate Code §633.33.
The Court then reaffirmed and validated Code 633A.4107 after holding state statutes allow Judges to dismiss a trustee under the trust’s terms or when the court finds the fiduciary:
- committed a material breach of the trust;
- is unfit to administer the trust;
- made consistent substandard investments for the trust;
- compensation is excessive under the circumstances;
- merges with another institution or the trust’s administration location changes;
- and co-trustees’ hostility or lack of cooperation impairs the trust’s administration, or
- for other good cause shown.
Karen did not “appreciate or understand” her fiduciary duties, according to Doyle, who held the trustee believed she could do whatever she wished with the trust assets as long as her brothers and sisters “ended up with equal distributions.”
Court documents showed the trustee seldomly kept records; did not communicate with the beneficiaries; took cash from the trust to purchase assets for personal use; and made unsecured loans to beneficiaries from the trust account.
Karen therefore did not manage the trust as a competent trustee would have, and she commingled trust assets with her own, acts which Judge Doyle held was good cause for the lower court to remove her as trustee under Code 633A.4107(b)(c) and (g).
The Court further held Judge Foy was correct in not letting Theresa serve as trustee despite the trust document allowing because “the strain in relations among the De Groote siblings” would have interfered with the new fiduciary’s objective management of the trust.
Attorney Fee Award Adjustment
Theresa and Sharon attached an appellate brief to Karen’s appeal, asking the Court to award them a greater amount in attorney’s fees. Karen responded by claiming her sisters did not “preserve the issue” for appellate review because they failed to file a separate cross-appeal.
Iowa Civil Procedures preclude prevailing parties who do not file proper cross-appeals “from seeking a more favorable ruling than the one obtained in trial court.”
Judge Doyle therefore held the Court can only consider matters properly presented on appeal, and because Theresa and Sharon did not formally cross-appeal, the Court cannot consider their request to increase the district court’s money award.
Fairness of Punitive Damage Awards for Negligent Fiduciary Performance
Karen also challenged the lower court’s authority to award punitive damages to Theresa and Sharon.
Here, Doyle affirmed the district court would have only abused its discretion to award the sisters money damages if Judge Foy based his decision on “unreasonable or untenable” grounds.
The Court then pointed out the fiduciary duties “to keep trust beneficiaries reasonably informed” and the right of a beneficiary “to receive an annual accounting” found in Iowa Trust Code §633A.4213.
In Karen’s case, she didn’t offer her sisters a requisite estate accounting “within a reasonable time.” And in Doyle’s opinion, Judge Foy was correct in applying Code 633A.4213(5)(a)(2) of which allows the court to “award attorney fees against a trustee who fails to provide an adequate accounting” after a beneficiary requests it in writing.
Theresa and Sharon formally surrendered their accounting requests in July 2016, and even though Karen may have eventually submitted the documents to her sisters, it required retaining a lawyer, filing a lawsuit, waiting nine months, and securing a special performance order from the court (of which Karen only semi-complied) to get Karen to perform her fiduciary duty.
Judge Foy’s award of $7500 to the plaintiffs was therefore not “unreasonable or untenable,” according to Doyle, because the trustee’s breach of duty “opened her up….to personal liability for the beneficiaries’ attorney fees” per state law.
So, in the end, Theresa and Sharon got half of what they wanted when the courts dismissed their sister as trustee, and Karen, although out of a job, didn’t have to pay all her sisters’ attorney fees.
The important thing to note here is that the Court rendered its final decision almost three years after Theresa and Sharon first sought Karen’s dismissal, and it took three lawsuits and thousands of dollars in attorney fees to remove the trustee from her post definitively. The trust further left the family’s control and is now in the hands of a corporate fiduciary who will most likely manage the trust by the book moving forward.
Moral of the Story
—absolutely assert your legal rights when trustees, executors and guardians breach their fiduciary duties owed to you and seek their discharge immediately. But keep in mind that the removal process is not easy, and it may take a while to dismiss the fiduciary from his/her assignment.
Source: In the Matter of the Virgil De Groote Revocable Trust (Iowa 2019)
